J. Paul Getty once said: "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." In modern times it could rephrased: "If the U.S. owes China $100bn, that's the U.S.'s problem. If the U.S. owes China $2tn (and growing), that's China's problem." The question is what can be done about it.
As Kenneth Rogoff notes, the current U.S./China imbalance resembles the U.S./Europe imbalances of the 1960s-70s. Europe didn't do so well in that deal, as the inflation of the 1970s eroded much of the dollar's value. But the issue is bigger now, and affects more than just China:
In the run-up to the financial crisis, the US external deficit was soaking up almost 70% of the excess funds saved by China, Japan, Germany, Russia, Saudi Arabia, and all the countries with current-account surpluses combined. But, rather than taking significant action, the US continued to grease the wheels of its financial sector. Europeans, who were called on to improve productivity and raise domestic demand, reformed their economies at a glacial pace, while China maintained its export-led growth strategy.
He says a dollar crisis is not imminent, but is "certainly a huge risk over the next 5 to 10 years". Recall that before the financial crisis Nouriel Roubini and Paul Krugman (among many others) were predicting a dollar crisis, and the U.S. now faces a much worse fiscal position than it did before the crisis. So there are legitimate reasons for worry, but Rogoff says this is China's problem, and only China can fix it:
Any real change in the near term must come from China, which increasingly has the most to lose from a dollar debacle. So far, China has looked to external markets so that exporters can achieve the economies of scale needed to improve quality and move up the value chain. But there is no reason in principle that Chinese planners cannot follow the same model in reorienting the economy to a more domestic-demand-led growth strategy.
Yes, China needs to strengthen its social safety net and to deepen domestic capital markets before consumption can take off. But, with consumption accounting for 35% of national income (compared to 70% in the US!), there is vast room to grow.
I'd add that some adjustment needs to come from Germany and other export-biased industrialized economies too, but Rogoff's point is sound: China desperately needs to develop its domestic market. This will hurt the U.S. some in the medium run as its borrowing costs go up, but it is a necessary transition.
Fortunately, we have a mechanism for gradual, relatively painless, macroeconomic adjustments: floating exchange rates. But that only works if the exchange rates are truly allowed to float. If they are not, then imbalances will continue to pile up until there is some sort of currency crisis, and then the adjustment becomes much more painful.
Right now almost every economic issue seems to be on the table, and this is the most pressing: the U.S. cannot continue to soak up all the excess savings in the world forever, and exporting countries need to reinvest some of those savings domestically. The global economy needs to transition, and there's no time like the present.